NetSol Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
NetSol designs, develops, markets and exports enterprise software and provides systems integration, consulting, implementation, maintenance and IT services, primarily for automobile finance and leasing, banking, healthcare and financial-services customers. The company operates through North America, Europe and Asia-Pacific segments, with Asia-Pacific representing the majority of revenue and operating income.
This unaudited Form 10-Q covers the quarter and six months ended December 31, 2012, the second quarter of fiscal 2013. The filing was signed February 12, 2013. Results are consolidated and include non-controlling interests.
Financial Performance and Position
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net revenues | $11.81 million | $8.61 million | $22.88 million | $14.83 million |
| Gross profit | $6.73 million | $4.70 million | $12.04 million | $6.85 million |
| Gross margin | 56.96% | 54.64% | 52.63% | 46.15% |
| Operating income | $2.92 million | $1.22 million | $4.42 million | $0.39 million |
| Net income attributable to NetSol | $2.22 million | $0.32 million | $3.15 million | $(1.14) million |
| Basic EPS | $0.28 | $0.06 | $0.41 | $(0.20) |
| Diluted EPS | $0.28 | $0.06 | $0.40 | $(0.20) |
- Six-month revenue mix was license fees of $6.75 million, maintenance fees of $4.71 million and services of $11.42 million.
- Six-month operating margin increased to 19.33% from 2.63%; operating expenses declined to 33.30% of revenue from 43.52%.
- Management reported non-GAAP EBITDA of $3.73 million for the quarter and $6.24 million for the six months, representing 31.56% and 27.26% of revenue, respectively.
- Net cash provided by operating activities was $9.43 million for the six months, compared with $3.96 million in the prior-year period.
- Cash and cash equivalents were $9.58 million at December 31, 2012, compared with $7.60 million at June 30, 2012 and $4.72 million at December 31, 2011. Restricted cash was $2.40 million.
- Accounts receivable were $15.62 million, and revenues in excess of billings were $11.44 million. Management reported a 135-day average days-sales-outstanding measure, compared with 151 days in the comparable prior-year period.
- Total assets were $98.55 million and total liabilities were $18.49 million at December 31, 2012. Total stockholders’ equity was $80.06 million, including $15.95 million of non-controlling interest.
- Debt and lease obligations included $5.05 million of loans and capital leases, $2.05 million of bank loans and $2.66 million of current convertible notes payable. The filing states that all borrowing covenants were satisfied and no defaults existed.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 37.2% year over year, driven by higher license, services and maintenance revenue. Six-month revenue increased 54.2%.
- Six-month license revenue increased 116%, primarily from new NetSol Financial Suite contracts. Services revenue increased approximately 51%, while maintenance revenue increased approximately 13%.
- Asia-Pacific remained the largest region, generating $16.14 million, or approximately 71%, of six-month revenue and $5.72 million of operating income. Europe generated $3.92 million of revenue and $0.75 million of operating income; North America generated $2.67 million and reported an operating loss of $0.47 million.
- Foreign-currency exchange gains increased to $0.90 million for the six months from $0.04 million in the prior-year period. The company also recognized $0.48 million of income from its equity-method investment, compared with a $0.10 million loss previously.
- Cash flow benefited from higher profitability and working-capital changes, while investing cash outflows included $3.54 million of property and equipment purchases, $2.13 million of intangible-asset additions and $0.62 million to purchase additional ownership in NetSol PK.
- The company replaced its 2011 convertible note in September 2012, reduced the conversion price to $4.93 per share and recognized related financing-cost and beneficial-conversion-feature expenses. $1.15 million of principal had been converted into common stock by December 31, 2012.
- A 10-for-1 reverse stock split became effective August 13, 2012. The filing presents historical share and per-share data on a post-split basis.
Guidance, Outlook, Risks and Unusual Items
- Management’s stated three-to-five-year plan targets annual revenue growth of 15% to 25%, gross margins of 55% to 60% in 2013 and average gross margins of 63% to 65% over the following three years. These are management targets, not guarantees.
- Management expects continued investment in China, Thailand, Pakistan, Vroozi, cloud infrastructure, sales and marketing, and product development. It identified opportunities in automotive finance, leasing, banking, e-commerce, cloud services and Saudi Arabia.
- Management expects working-capital needs of approximately $5 million to $7 million over the next 12 months for business development and infrastructure. The filing states that future capital raising may be considered, but that equity dilution and market conditions are concerns.
- Key reported risks include geopolitical unrest in Pakistan and Afghanistan, U.S.-Pakistan relations, European economic weakness, renewed recession, customer budget constraints, delayed collections, price competition in China, foreign-currency volatility, dependence on key personnel and technology obsolescence.
- The company reported a material weakness in internal control over financial reporting because accounting personnel lacked sufficient technical expertise in complex U.S. GAAP matters. Management stated that remediation will include additional training, U.S. GAAP expertise and potential recruitment; disclosure controls and procedures were deemed ineffective as of December 31, 2012.
- The filing reports no material pending or threatened litigation and no defaults upon senior securities.
- Subsequent events included the issuance of 121,704 shares upon conversion of $0.60 million of convertible-note principal and the exercise of employee and officer options for additional shares.
- Foreign-currency translation losses reduced comprehensive results; accumulated translation losses were $13.89 million at December 31, 2012.
Important Facts for Investors to Verify
- Whether the reported revenue and margin growth, particularly from license sales and Asia-Pacific operations, is recurring rather than dependent on unusually large contracts or favorable currency movements.
- The collectability and aging of the $15.62 million accounts receivable balance, the 135-day collection cycle and the $11.44 million revenues-in-excess-of-billings balance.
- The maturity, conversion terms and potential dilution from the $2.66 million convertible notes, outstanding options and warrants, including the subsequent conversions.
- Progress in remediating the material weakness in U.S. GAAP expertise and internal controls.
- Compliance with subsidiary debt covenants and the ability to fund the anticipated $5 million to $7 million working-capital requirement without material dilution.
- The sustainability of reported earnings given the $0.90 million foreign-currency gain, $0.48 million equity-method income and other non-operating or non-cash items.
- Execution and profitability of Vroozi, cloud initiatives, China and Thailand expansion, the Saudi joint venture and other announced contracts.